Dollar hits record low vs. euro

U.S. slowdown saps greenback; yen at new low on soft inflation

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar fell to an all-time low against the euro Friday, after a government report showed the U.S. economy slowed to a real annualized growth rate of 1.3% in the first quarter, marking the weakest expansion in four years.

The euro jumped to an intraday high of $1.3682 in the immediate wake of the weaker-than-expected GDP reading, as traders sold the U.S. currency on expectations the Federal Reserve will remain sidelined or cut rates in the near term. The previous record was $1.3666, reached in December 2004. The dollar later pared some of its losses as traders adjusted positions before the weekend.

"The weaker-than-expected GDP was the catalyst to set a new lifetime high," Timothy Mazanec, senior currency strategist at Investors Bank & Trust Co., said in reference to the euro. "The dollar will continue to weaken and European currencies continue to gain."

The European Central Bank and the Bank of England are "still raising interest rates," he said. "Thus, interest-rate differentials will favor the euro and the pound for a few more months."

Late in New York, the euro last traded at $1.3650, compared with $1.3601 late on Thursday. The dollar was quoted at 119.45 yen, compared with 119.60 yen.

On the week, the dollar lost 0.4% vs. the euro, but managed to eke out a 0.6% gain against the yen.

The British pound traded at $1.9983 vs. $1.9909, after having hit $2.0133 last week -- sterling's loftiest level since 1981. The dollar also changed hands at 1.2051 Swiss francs, compared with 1.2083 francs.

The Commerce Department said the slower U.S. rate reflected higher energy prices as well as weakness in the housing market, while growth in the first quarter was led by consumer spending. Economists polled by MarketWatch had been expecting a rate of 1.7% for first-quarter GDP. See full story.

The GDP reading "was a big disappointment," said Matthew Strauss, senior currency strategist at RBC Capital Markets. "It highlights the importance of U.S. consumers in keeping the U.S. economy growing."

Stagflation?

Led by higher energy costs, the GDP price index increased 4%, the most in 16 years, the Commerce Department said. See full story.

"The persistence of core inflation above the Fed's comfort zone coupled with renewed deterioration in growth moves us ever closer to that dreaded 's' word of stagflation," said Michael Woolfolk, senior currency strategist at The Bank of New York.

"While the Fed will not yet be forced to raise rates to arrest rising inflation, it will be handcuffed from cutting rates to stimulate growth," he said, in a note to clients. "This precursor stage to stagflation deserves its own name; let's call it 'sagflation.'"

But Ashraf Laidi, chief foreign-exchange analyst at CMC Markets in New York, said the current stagflation tendencies will only be "a temporary phenomenon."

"As history has proven over the past 15 years, economic shocks are the source of inflation declines," he said, in a note. "With U.S. manufacturing expected to remain in a recession and services based on a shaky consumer foundation, the slowdown story will start to drag on inflation."

Separate U.S. economic reports showed employment costs increased 0.8% in the first quarter, slightly less than the 0.9% expected, while the Reuters/University of Michigan consumer sentiment index rose to 87.1 in late April, against expectations for the index to weaken to 85.0. See full story.

'Green light'

"The dollar is probably going to continue to remain under pressure next week," said Ronald Simpson, managing director of global currency analysis at research firm Action Economics. "We've got a contrasting picture [of growth] between the U.S. and Europe right now. The euro will continue to be bought on modest pullback next week."

But RBC's Strauss said the euro/dollar market is currently "very much overbought, so technically, it's going to be difficult for the market to rally much further."

"We'll probably see trading more around these all-time high records," before the euro ultimately moves higher, he said.

Kathy Lien, chief strategist at DailyFX.com, said she believes "the euro/dollar could take a shot at 1.40."

The next key pieces of data for the dollar will be the Institute for Supply Management's manufacturing and nonmanufacturing reports as well as nonfarm payroll data, all due out next week, she said.

Yen at new low

Elsewhere, the yen remained under pressure, touching a record low against the euro after a report showed Japan's core consumer price index fell 0.3% last month from a year earlier, below expectations for a decline of 0.2%.

Separately, industrial production unexpectedly fell 0.6% in March, well below the consensus calling for a gain of around 1%.

The Bank of Japan's rate-setting policy board on Friday voted unanimously to keep monetary policy unchanged at 0.5%, as had been widely anticipated. The central bank maintained its outlook for steady growth in its semiannual report.

Bank of Japan Gov. Toshihiko Fukui said the central bank's long-term view on prices is more important in setting monetary policy, but he added there was no schedule for future rate hikes. Economic growth and the core CPI rate will likely accelerate in the long run in response to easy monetary conditions, he added.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.